Chapter 22 S Corporations

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Discussion Questions
1. LO.1 Which of these taxes applies to an S corporation?
a. Alternative minimum tax.
b. Tax on certain built-in gains.
c. Property tax assessed by the county.
2. LO.2 Which of the following are requirements to be an S corporation?
a. Limited to a maximum of 100 shareholders.
b. Has no resident alien shareholders.
c. Has only one class of stock.
d. May have no straight debt.
e. Cannot have any earnings and profits (E & P).
3. LO.2 One shareholder of an S corporation takes a short-term unwritten cash advance of $9,100 during the tax year. Would this arrangement create a second class of stock? Explain.
4. LO.2 Which of the following can be shareholders of an S corporation?
a. Partnership.
b. Limited liability partnership.
c. Corporation.
d. Limited liability company.
5. LO.2 Joey lives in North Carolina, a common law state. He is a shareholder in an
S corporation. If he marries a nonresident alien, will the S election terminate?
Would your answer change if he lives in Louisiana? Explain.
6. LO.2 Bob Roman, the major owner of an S corporation, approaches you for some tax planning help. He would like to exchange some real estate in a like-kind transaction under § 1031 for real estate that may have some environmental liabilities.
Prepare a letter to Bob, outlining your suggestion. Bob’s address is 8411 Huron
Boulevard, West Chester, PA 19382.
7. LO.2, 3 On March 2, 2016, the two 50% shareholders of a calendar year corporation decide to elect S status. One of the shareholders, Terry, purchased her stock from a previous shareholder (a nonresident alien) on January 18, 2016.
Identify any potential problems for Terry and the corporation.
8. LO.4 Caleb Samford calls you and says that his two-person S corporation was involuntarily terminated in February 2015. He asks you if they can make a new S election now, in November 2016. Draft a memo for your firm’s tax research file, outlining what you told Caleb.
9. LO.6 Using the categories in the following legend, classify each transaction as a plus (t) or minus (_) on Schedule M–2 of Form 1120S. An answer might look like one of these: tAAA or _OAA.
Legend
AAA ? Accumulated adjustments account
OAA ? Other adjustments account
NA ? No direct effect on Schedule M–2
a. Receipt of tax-exempt interest income.
b. Administrative expenses.
c. Depreciation recapture income.
d. Nontaxable life insurance proceeds.
e. Expenses related to tax-exempt securities.
f. Charitable contributions.
g. Business gifts in excess of $25.
h. Nondeductible fines and penalties.
10. LO.6, 11 Collette’s S corporation holds a small amount of accumulated earnings and profits (AEP), requiring the use of a more complex set of distribution rules. Collette’s accountant tells her that this AEP forces the maintenance of the AAA figure each year. Discuss the issues that arise with respect to distributions when an
S corporation holds AEP.
11. LO.6, 8 Scott Tierney owns 21% of an S corporation. He is confused with respect to the amounts of the corporate AAA and his stock basis. Write a brief memo to Scott, identifying the key differences between AAA and an S shareholder’s stock basis.
12. LO.8 For each of the following independent statements, indicate whether the transaction will increase (t), decrease (_), or have no effect (NE) on the basis of a shareholder’s stock in an S corporation.
a. Expenses related to tax-exempt income.
b. Short-term capital gain.
c. Nonseparately computed loss.
d. Section 1231 gain.
e. Depletion not in excess of basis.
f. Separately computed income.
g. Nontaxable return-of-capital distribution by the corporation.
h. Advertising expenses.
i. Business gifts in excess of $25.
j. Depreciation recapture income.
k. Dividend income received by the S corporation.
l. LIFO recapture tax paid.
m. Collection of a bad debt previously deducted.
n. Long-term capital loss.
o. Cash distribution to shareholder out of AAA.
13. LO.9 Sheila Jackson is a 50% shareholder in Washington, Inc., an S corporation.
This year, Jackson’s share of the Washington loss is $100,000. Jackson has income from several other sources. Identify at least four tax issues related to the effects of the S corporation loss on Jackson’s tax return.
14. LO.1, 11 One of your clients is considering electing S status. Texas, Inc., is a sixyear- old company with two equal shareholders, both of whom paid $30,000 for their stock. Going into 2016, Texas has a $110,000 NOL carryforward from prior years. Estimated income is $40,000 for 2016 and $25,000 for each of the next three years. Should Texas make an S election for 2016? Why or why not?